That famous online marketplace from the Internet 1.0 era—best known for hawking kitschy collectibles like Pez dispensers—is a far cry from the highly targeted, sophisticated marketplaces of today, judging from the companies that turned out in force for the first annual Marketplace Conference in San Francisco last week.

The conference, organized by Crux Capital and Speedinvest, an Austrian investment fund, drew over 200 entrepreneurs, investors and others to learn the secrets of scaling marketplace businesses, or those that bring buyers and sellers together online. Attendees included a German company called PaulCamper that matches vacationers online with RV owners, to StyleSeat, which provides a venue for connecting people with hairdressers and makeup artists online.

Several venture capitalists also offered advice about building more robust marketplaces and pitching them to investors. Matt Cohler from Benchmark Capital and Roger Lee from Battery Ventures spoke at length during a panel discussion about “What Series A Investors Look For” in fledgling marketplace businesses.

One sometimes-vexing issue for investors is separating “fake” marketplace businesses—those driven mainly by heavy marketing spending to acquire customers—from those growing because of genuine, robust demand for their product or service. “Lots of marketing spend is sometimes a warning sign,” Battery’s Lee said. He said his firm looks for “real” marketplace businesses with these characteristics:

A large market, preferably a total addressable market of $50 billion or more;

A fragmented market, so that one strong player can aggregate demand and supply in one place online;

Highly efficient growth, meaning the company is spending appropriately on marketing relative to how much money customers spend on the marketplace and how often they come back;

A “shadow market”, or a previously untapped market, like people renting their own homes out on Airbnb or using their own cars to become Uber drivers; and

Strong network effects, meaning the product or service becomes bigger and more valuable the more people use it. This also helps create a deep “moat” around the company that is difficult for competitors to penetrate, Lee said.

Cohler, from Benchmark, noted that determining a business’s TAM is sometimes difficult, however. In the early days of Uber, he noted, it was difficult to determine that the service would eventually become as entrenched as it is today, since it first started as a substitute for radio-controlled black cars and limousines—not as a taxi substitute that also generated demand from people who otherwise would drive their own cars.

Both Cohler and Lee also said investors often don’t just look at averages when evaluating marketplace-company metrics, like average usage frequency or average customer value. Instead, they focus on specific sets, or “cohorts” of users acquired during a specific period of time, and then track how these customers use and pay for the service over a long period. This is important because monitoring this activity can help a company (and potential investors) understand the long-term durability and value of its users.

Lee added that his firm also likes to segment a company’s customers to study the “most addicted” users of a marketplace—perhaps the top one or two percent of users—to get a better idea of how the business could grow and become more entrenched in a market. The activity of these customers can offer clues about what new “use cases” for the marketplace are possible; what customer demographics and psychographics the company could be targeting; and, eventually, what new shadow markets can crop up around the existing marketplace. With many marketplace businesses, perhaps five to 10 percent of users drive 50% to 75% of the activity, Lee said.

The sold-out marketplace conference also featured sessions on government oversight of marketplace businesses, understanding where marketplace customers come from (“attribution”) and blockchain marketplaces, among others.

Battery is a global, technology-focused investment firm pursuing the most promising companies and ideas. Founded in 1983, the firm makes venture-capital and private equity investments from offices in Boston, the San Francisco Bay Area, London and Israel. Follow the firm on Twitter
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